Is P2P a Safe Investment?

2 UK P2P lenders have failed already in 2019. Your capital is at risk.

Is P2P a Safe Investment?

FundingSecure the pawnbroker-come-peer-to-peer lending platform has failed. Their founders mostly cashed out 12 months ago[]. This is the second UK-based P2P failure in 2019, with Lendy failing in May.

If you are an investor with FundingSecure, you are now locked out of your account. You have no idea if you’ll get your money back. You’ll have to wait and see. Given FundingSecure was the wild west[], you might struggle to get your capital back. This is stark news.

In some good news, Lendy’s administrator believes the loan book is at least partially realisable. The first payments back to investors from loan payments will occur on Monday.

If you do have an investment with FundingSecure and want to contact the administrator, read the full details here

Given this is the third stark warning about P2P in the UK in 2019, is P2P a safe investment?

What is P2P Lending?

Peer to Peer (P2P) Lending is a new form of Investment in the UK. You pool your money with other investors via a P2P platform. Called crowdfunding. The P2P platform then lets you loan out your collective funds to borrowers.

The loan is often between you and the borrower, and the platform is an intermediary. This may depend on the platform. Sometimes the loan between another company and the borrower. Your investment is sometimes diversified among many loans. This depends on the platform and your choices.

The type of loans depends on the platform. Consumer loans. Business loans. Property. Even camels.

Camillo the Camel says: 'Invest in Mogadishu Camel milk production for as little as $1,500'
Camillo the Camel says: 'Invest in Mogadishu Camel milk production for as little as $1,500'

I shit you not: Camels. Forget Somali Pirates. You can own your very own milk-producing camel in Mogadishu. If you want to take on the risk.

In the UK, you can wrap up your Peer to Peer Investments in the new Innovative Finance ISA (IFISA). The IFISA is a new ISA introduced in April 2016 designed for P2P loans. This means any interest earned is tax-free. It forms part of your annual ISA allowance of £20K.

With savings rates so low, P2P has surged in popularity. The attractive rates are often higher than safer forms of investing - 5% or more. However, P2P is significantly riskier than cash savings.

FundingSecure “Junk”

FundingSecure was a pawnbroker-come-peer-to-peer-lender. Borrowers could take out loans secured against their ‘high worth’ assets. Like antiques. Jewellery. Artwork. Yachts. Luxury Watches. Luxury Cars. Even Picassos. FundingSecure worked closely with an ‘Auction House’ to value the securities.

In FundingSecure Ltd v Matthew Green[], FundingSecure lent £2.3m to Green, an alleged fraudster and launderer. The loans were secured against high-worth paintings by the likes of Picasso & Dufy. Despite FundingSecure stating the securities would be held by them, Green took out further loans secured against the artwork. Green naturally defaulted and eloped to rehab in Spain.

Doing some laundry Pablo?
Doing some laundry Pablo?

In March[] this year, £24m of FundingSecure’s £88m loan book was in default.

I mean if this isn’t the definition of junk, I don’t know what is. FundingSecure was the wild west[]

Administrators were appointed 3 days ago.

Is Peer to Peer Lending Safe?

The short answer is Crowdfunding Investments are risky. ‘Safety’ depends on the platform and loan.

Here are a few risks to consider:

Money Mage believes:

Money Mage currently holds no funds in P2P due to these risks. This may change in the future. Money Mage believes P2P is inadequately protected and regulated in the UK. With new regulations in December 2019, the situation will improve.

This is an opinion and not advice! See the Disclaimer.

Financial Conduct Authority Warning

The regulator has been unhappy with the state of P2P and investor exposure.

The Financial Conduct Authority wrote to the CEOs of all P2P lending firms in the UK in March 2019. The FCA strengthened regulation of P2P in June 2019. The new regulations come into force in December 2019.

The FCA wants to improve the situation. The goals of the improved regulation according to the FCA:

Investors:

Platforms:

The UK strengthening of regulation of P2P in December 2019 means:

This strengthening will be a good thing for P2P in the UK. Ratesetter CEO Rhydian Lewis agrees:

“No longer can our sector be dismissed as the Wild West of investing: the cowboys are being driven out and the regulation is now on a par with mainstream savings and investment choices.”

The UK regulations changes come into effect in December 2019.

Fuel on the FIRE

This won’t be a popular opinion I know.

Crowdfunded loan platforms are popular among Financial Independence, Retire Early Blogs. Fueled by affiliate programs & referral kickbacks.

One side of the coin is good intention. Rationality. Warnings about risk. Analysis of liquidity. Recommendations to diversify across platforms. Consideration of platform insolvency.

The other side of the coin is self-interest in growing blog revenue to speed up Financial Independence. Over-focus on returns. “Over 30% growth”. Skimming over some of the risks. Non-obvious referral links. Positive spin not objective analysis.

Would you put 10% of your wealth into a company formed in 2017 who’s registered offices are in Tbilisi? I know they have a pretty CEO and all. The old “too good to be true” adage rings loud.

Know the P2P Risks

P2P is risky. If you understand the risks, you can plan to mitigate them. If you are comfortable with the mitigations, P2P might be for you.

With P2P:

Money Mage Verdict

Peer to peer crowdfunded platforms are risky.

Some platforms are completely unregulated. Some platforms are in jurisdictions where you will have no recourse. In the case of Lendy failing, administrators are able to realise a portion of the loan book. I doubt the same will apply if your Mogadishu or Tbilisi-based platforms collapse.

Money Mage currently holds no investments in P2P: Some platforms are nothing less than ‘the wild west’.

If you do invest in P2P, diversify across platforms to reduce your risk of a platform collapsing. FundingSecure and Lendy have collapsed in the past 6 months alone. Also, ensure P2P is a small part of a wider, well diversified investment portfolio.

With the changes in regulations in the UK in December 2019 my view may change. Let’s see.

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Sources and Attribution

  • https://www.p2pfinancenews.co.uk/2018/11/02/fundingsecure-owners-sell-off-majority-stake-to-fund-growth-plans/
  • https://www.maitlandchambers.com/information/recent-cases/funding-secure-ltd-v-matthew-green-2019
  • https://www.telegraph.co.uk/investing/news/widespread-defaults-hit-peer-to-peer-investors-chasing-12pc/
  • https://beta.companieshouse.gov.uk/company/08120200
  • https://uk.trustpilot.com/review/www.fundingsecure.com
  • Agrikaab Camel, (c) Agrikaab.
  • Musée Picasso, (c) Christophe Becker, CC-BY-ND